FinTech unleashed: How fertile is the FinTech-entrepreneurship soil?

Make no mistake, the FinTech space is booming. But what makes it so important? We invited eight of the world’s biggest FinTech influencers to talk about the growing relationship between FinTech and entrepreneurship and blockchain’s relevance in this context.

FinTech opens the door to ______

No, this is not a gap filling exercise but it should prepare you for what’s coming. In the second part of this interview series, we asked eight FinTech influencers to identify the biggest trends in FinTech and discuss whether it has managed to leave its disruptive label behind. Jim Marous opined that“the term FinTech may have outlived its usefulness, or at least be weakened by overuse” while Neira Jones claimed that FinTech is “a natural evolution of the industry that has been brought about with the substantial advances in technology.”

We’ve seen what FinTech is and we’ve analyzed the love-hate relationship it has with banks but let’s not forget about its developing relationship with entrepreneurship. Plus, some voices claim that FinTech has started to flirt with blockchain — is it true, though? Let’s see what the influencers have to say.

8 answers: Do you think the investment potential will attract entrepreneurs to FinTech?

The FinTech Heroes

Mike Quindazzi is the Managing Director for Southwest area of PwC.

Jim Marous is the co-publisher of The Financial Brand, and owner and publisher of the Digital Banking Report.

Spiros Margaris is the founder of Margaris Advisory. He is a senior advisor and investor at InsureScan.net.

Andreas Staub is CCO and Managing Partner at Fehr Advice. He has over 15 years of management experience in banking.

Chris Gledhill is CEO and co-founder at Secco Aura. He is passionate about disruptive tech, financial inclusion and innovation.

Neira Jones is a Non-Executive Director for cyber security firm Cognosec and payments innovator Comcarde. She chairs the Advisory Board for mobile innovator Ensygnia and is a partner for the international Global Cyber Alliance.

David G.W. Birch is Director of Consult Hyperion, the secure electronic transactions consultancy. He is an internationally recognised thought leader in digital identity and digital money.

Mike Quindazzi: It’s impossible to predict the future but there are a few interesting indicators. In 2016, the capital markets experienced a few ups and downs. The IPO market slowed while investments and startup valuations continued to build. In 2017, the US stock markets have picked-up. Startups are staging at a greater rate to go public, yet many are dual-tracking and planning for other exit strategies. So it appears like the market is robust for entrepreneurs looking to grow with a company.

For new upstarts, the equation also seems positive but maybe riskier for entrepreneurs. Today, startups have access to free open source software, growing amounts of data, robust APIs, scalable cloud computing and source development needs on-demand and from low-cost markets. So now the technology barrier-to-entry has dropped, and the door is wide opened for entrepreneurs to develop solutions with a limited need for upfront capital.

Need more enticement? FinTech startups have the ability to innovate quickly without the encumbrance of legacy costs, infrastructure or the risk adverse culture found in legacy players.

So what’s the catch? It’s a very competitive world. New ventures are being started every day looking to attract the best people and the smartest money. Venture capital is looking for unique companies with new and differentiated services that previously have not existed. If multiple companies are working on parallel ideas, it’s a race to relevance for the entrepreneurs.

Startups must be able to evolve from early-stage to later-stage companies. Often this takes years (sometimes a decade or more) and a collection of talented people and savvy backers. Strong leadership is required to guide an organization of idea generators/developers to a team great business manage while moving from controlled chaos to structured process, all while continuing the entrepreneurial sprint.

Jim Marous: There is a challenge between the desires of investors (who want quick and significant returns) and most FinTech solutions (which need to meet regulatory standards and demonstrate both scaleability and moderation of risk in various rate and competitive environments). There will continue to be movement of capital to support FinTech solutions, but there will be a shift from the speculative nature seen in the past to the realization that FinTech is more of a long-term play.

Spiros Margaris: The smart money will invest in FinTech no matter what the market sentiment is because FinTech is here to stay. So, it is better not to try to time the market but to invest in good people and FinTech businesses. Valuations will fluctuate but sound investment should always provide for good returns if investors apply sound judgement. Just try not to be greedy because greed is a bad source for wise investment decisions.

It is not only about digitizing the front end.

Andreas Staub: FinTech will always attract investors. Banking is emotional and attractive. And banking will be more and more interdisciplinary. The on-going convergence is the „fertile soil“ for further innovation and new ideas.

Chris Gledhill: Yes.

Pascal Bouvier: Yes. Furthermore, with each new “FinTech wave” we will see entrepreneurs with greater degrees of sophistication applying themselves to more complex value propositions. In other words, it is not only about digitizing the front end.

Neira Jones: Yes.

David G.W. Birch: There will be continued investment, although I think investor focus is beginning to shift away from “vanilla” plays for retail payments, personal financial management and so on.

I know it’s unfashionable to say so, but I’m not convinced that “challenger” banks will make a big difference in the market place. Instead, artificial intelligence, passive biometric authentication and shared ledgers might do.

How important is blockchain in this equation? Can FinTechs help it go mainstream?

Mike Quindazzi: Blockchain is no longer just about bitcoin or the broader category of cryptocurrency; it’s about the underlying technology. It’s unique and differentiated in that it’s immutable ledger with a single version of the truth of the transaction. And unlike other immutable datastores, it is also a shared or distributed ledger across a peer-2-peer private or public network.

By the 2020s, PwC expects that blockchain-based systems will be used by leading enterprises to reduce or eliminate categories of validation and verification friction for simple transactions. Moreover, these simple transactions will become the basis for smart contracts, a promise to automate processes and make them legally binding and self-enforcing at the same time.

As of the beginning of 2017, Venture Scanner was tracking 875 blockchain and bitcoin technology companies across 12 categories, and popping up in 73 countries, with a total of $1.8 billion in funding.

In many situations, blockchain has been a solution looking for a problem.

More specifically, the PwC DeNovo team found the blockchain ecosystem is evolving quickly with several consortiums driving proofs of concepts, and several startups focusing on different aspects of the market. The DeNovo team is following 158 blockchain-specific companies across 24 industry sub-sectors, illustrating the wide-ranging and flexible nature of the technology. What’s interesting about these numbers is they are all pure-play blockchain companies in the financial services industry, and it excludes cryptocurrency and exchange companies.

These startups are positioned to help build-out blockchain ecosystems which will require four layers of technology including:

1) application

2) application development and APIs

3) protocol/ business logic and

4) distributed messaging.

Associated with this distributed ledger stack, are hosted services that encompass all aspects of the technology in the cloud. This type of cloud computing environment enables startups to enter the fray as blockchain still requires further experimentation and development.

There are two limiting factors with the bitcoin model that need attention for blockchain to go mainstream. First, unaffiliated miners are unlikely to be viewed as an accepted participant by regulators or banks. Second, transaction throughput is technologically limited and needs to increase exponentially to challenge the legacy systems.

Jim Marous: There is still quite a bit of ‘testing the waters’ regarding the use of blockchain. In many situations, blockchain has been a solution looking for a problem. In the future, the most promising use of blockchain will most likely be in universal identity. Privacy and identity fraud is an increasing problem that blockchain may be able to help solve.

When we feel like giving up on blockchain, we will probably be very close to a mainstream breakthrough.

The most important trends in the next several years will be the partnership between non-bank solutions and legacy banking organizations, the continuing change in regulations, and the transformation of delivery from consumer requested solutions to predictive delivery by providers. While more subtle, the industry will begin to deliver on the consumer demands of “know me, look out for me and reward me” … in real time.

Spiros Margaris: Eventually, we will see blockchain use cases that people and firms will love to use and then it will likely go mainstream. However, in my view, the blockchain silver bullet that works wonders for the many industries people say it will work in does not exist, but the huge potential of the technology is obviously there. So, to answer your question, yes, the FinTech industry does provide a constant blockchain interest, and in that respect, it helps the blockchain industry to stay in the minds of people and investors.

I believe it will be similar to when we look for an address and can’t find it and then ask someone for help. Often, when we receive the address information from the person in the street, we are very, very close to it. In other words, when we feel like giving up on blockchain, we will probably be very close to a mainstream breakthrough.

Andreas Staub: To be honest, I don’t believe blockchain will deliver all the promises and fulfill the hopes associated with. But maybe I’m wrong. Anyway, it’s a great idea and invention and yes there will be some applications going mainstream. But then as a commodity for all FinTechs and incumbents.

If there’s a genuine customer/business problem that blockchain and wider DLT can solve, that can’t be done better with existing architectures, then blockchain will go mainstream. Probably won’t be as groundbreaking as some expect, maybe akin to cloud tech in terms of disruptiveness.

Pascal Bouvier: Not as important as the current hype. More important than financial institutions realize. By that I mean that true blockchain tech (the permissionless variety) may be uniquely disruptive but have less applicability across use cases, while distributed ledger technology (the permissioned variety) will have wider applicability but in a more incremental way without major disruptions.

Neira Jones: Blockchain is very relevant in very specific scenarios but we must be careful not to think of it as the panacea to all things… I am sure my friend Dave Birch would agree with this…

David G.W. Birch: Blockchain is a RegTech not a FinTech. I don’t see cryptocurrency mainstream any time so soon but solving problems around shared KYC, identity fraud and so on will drive the technology forward.

In the last part of the interview series, we talk about the innovation and we try to paint a picture of the future of finance.